Conditional Nod For Kannur Power Project

The Enron-promoted 500 mw Kannur power project in Kerala has been accorded only conditional clearance by the Foreign Investment Promotion Board (FIPB). The FIPB has held that the Kannur power company can bring in foreign direct investment only if it does not go against the directions of the Kerala High Court on the policy followed by the state government for liquid fuel allocation.

The FIPBs clearance is for 26 per cent of the total equity amounting to $30-40 million through the NRI-promoted (KPP Nambiar, formerly secretary to the government of India) Koretech Corporation Ltd. The Centre has imposed similar conditions for investments to be made by Enron itself, which proposes to hold 74 per cent equity (amounting to $100 million) in the project.

 

The Kerala High Court had put a hold on all the liquid fuel projects after a power project promoters in the state had appealed against the procedure followed by the state for the allocation of fuel. The state government had allocated its share (of around 700 mw) from the 12,000 mw set aside by the Centre for liquid fuel projects to only three naphtha-based projects, including the 500 mw Kannur project.

The court had shot down the state governments allocation procedure which gave importance to the fixed costs of the projects. This procedure left other promoters such as those using furnace oil ineligible for fuel allocation. These promoters had contested that the allocation procedure followed was lop-sided and did not consider the total project cost which includes both fixed and variable costs.

The promoters also said that the actual allocation was also contradicting the recommendations made by CRISIL, which had rated some furnace oil-based projects above the naphtha-based projects that eventually got the allocation.

Finding the argument of the furnace oil-based project promoters to be logical, the Kerala High Court said that if only fixed cost were used for evaluating projects then the capital costs would be lower for naphtha-based projects. However, if the total cost approach was followed then naphtha-based projects would not be found viable as the price of naphtha as a fuel was very high as compared to furnace oil.

In view of the fact that it would eventually be the consumers that would have to bear the final impact of such allocations, the High Court passed the verdict that the state government would have to reissue the liquid fuel allocations.